Home-Equity Loans Harder to Come By

DEAR BENNY: My wife and I bought our first home in November of last year. We paid $600,000 for the house and put 20 percent down so the mortgage is for $480,000. I’ve heard that opening a line of credit on the house is a good idea in case of an emergency. Obviously our house hasn’t really appreciated since then, and I think we’ve put less than $1,000 towards the principal. Can we take out a line of credit based on the down payment because it’s technically equity? Or will the mortgage company laugh in our face? Thanks! –Chris

DEAR CHRIS: I certainly hope they won’t laugh in your face, but under your circumstances, I doubt that you will be able to obtain a home equity (HELOC) loan at the present time.

Yes, I absolutely believe that every homeowner should have a HELOC. It’s a line of credit that you use only when you are in need of money. You do not pay any interest or principal until you actually draw down on that line. To me, it’s a checkbook in my desk drawer for that rainy day.

Generally, banks will not give you a HELOC if you have only 20 percent equity in your house. In fact, in recent months, I have heard that some banks — concerned with declining real estate values — have been unilaterally restricting and lowering the amount that homeowners can borrow under their HELOC. While this may be completely legal (depending on the terms of the promissory note that you sign in favor of the bank), it is disturbing to me. Because I want that HELOC available for that rainy day, one such day is when my house starts to decrease in value while at the same time my adjustable-rate mortgage starts to increase and I cannot afford the monthly payments.

If your house did appreciate, however, by all means talk to some local banks and see what they are willing to offer.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted tobenny@inman.com.

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